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Industry and Company

Analysis
Advanced Financial Statement Analysis
4/7/2016

Submitted by
Group 11 (F1 Kengeri)
Adhitya Vadlapati 1527201
Aman Singh 1527202
Durgesh R- 1527211

S.No

Table of Contents
Section A- Industry Analysis
1 Overview of the Industry
2 Production Data
3 Exports and Imports Data
4 Industry Fact Sheet
5 Market Data
6 Industry concentration and HHI
7 Raw material composition
8 Economic Analysis
9 Recent Developments

10 Future Outlook
11 Porters five force analysis
Section B- Ceat Limited (Company Analysis)
12 Company- Snapshot
13 Key Financials
14 Financial Highlights
15 Revenue Drivers
16 Cost Drivers
17 Key Financial Ratios

A. Indian Tyre Industry


1. Overview
1.1 Introduction

Tyre Industry, the wheels of Indian economy has a direct bearing on the countrys
performance

The Indian Tyre Industry is an integral part of the Auto Sector and its fortunes are
interdependent on those of the Automobile players.

More than one million people, including dealers, re-traders and truck operators get direct
and indirect employment through this sector.

The industry can be divided principally into two key segments - the OEM and
replacement sectors.

The demand for tyres in the OEM sector is dependent on the sales trend of new vehicles,
while the demand in the replacement sector is related to usage patterns and replacement.

1.2 Industry Segments


Vehicle Categories

Tyre Markets
Tyre Design

1. Vehicles for Commercial Use


2. Vehicles for Personal Use
1. Original Equipment Manufacturers
2. Replacement Demand
3. Exports
1. Cross Ply Tyres
2. Radial Tyres

1.3 Indian Tyre Industry 2015 -16 A Profile


No. of Tyre Companies
No. of Tyre Plants
Revenue(in Rs Crores)
Exports in value(in Rs Crores)
Production(lakhs/Nos)
Exports(lakhs/Nos)
Imports(lakhs/Nos)

39
60
53000
10500
1461
86.8
96

2. Tyre Production Data


2.1 Total Tyre Production

Source: www.accordfintech.com

Total tyre production in FY15 has witnessed a growth of over 13 per cent to 1461.50
lakh unit as compared to 1288.78 lakh unit sold in FY 14

However, production of tyre during April-July FY16 declined due to cheap import
from China in the period of compared to the same period previous year.

2.2 Segment Wise Production

Source: www.accordfintech.com

The production of Medium & Heavy Commercial Vehicle (M&HCV) tyres, that adds
over 50 percent to the top line of tyre industry in India

A larger drop of 11 percent was witnessed in Light Commercial Vehicles (LCVs) and
Small Commercial Vehicle (SCVs) tyres.

Tyre production has also been impacted by consistent drop in agriculture production
which has fallen for second consecutive year.

Both Tractor front and tractor rear tyre production dropped by 11 percent and 13 percent
respectively.

Scooters tyre production rose by 9 percent and motorcycle tyre production increased 13
percent in the same comparative period

Passenger car tyres have seen a growth of 7 percent during the current fiscal year.

3. Exports and Imports Data


3.1 Exports

Source: www.accordfintech.com

In FY15, export of tyre declined by 3.59 per cent to 86.81 lakh units as compared to
90.04 lakh units exported in FY14.

Exports of Medium & Heavy Commercial Vehicle tyres was down by 5 percent.

Percentage of export to production too has come down successively in case of M&HCVs

3.2 Imports

Import of truck and bus radial tyres (TBR) has increased 60% in 2014-15 over the
previous year.

TBR imports rose to 7.8 lakh tyres from 4.9 lakh tyres in 2013-14

Roughly 25 per cent of domestic replacement demand for TBRs is being met by imported
tyres.

Chinese imports are even below the cost of raw materials that go in the making of a truck
& bus tyre. This is causing huge injury to the domestic tyre manufacturers.

Import of TBRs from China has gone up three times from 1.9 lakh tyres in 2013-14 to 5.5
lakh tyres in 2014-15 and China has come to account for 70 per cent of total TBR import
by volumes in India.

4. Industry Factsheet

Source:www.icra.in

5. Market Data
5.1 Market Share of Indian Tyre Companies

Market Share (based on FY15 Sales)


3%

4%

MRF

6%

Apollo
29%

4%

JK Tyres
Ceat

5%

Balkrishna

7%

Birla
Bridgestone
12%

17%
13%

Goodyear
TVS Srichakra
Others

Source: www.icra.in

Market is dominated by few large players, with MRF remaining the leader

Over the years, MRF has been the dominant player in the country (estimated based on
turnover)

Several players (Apollo, JK and CEAT in particular) have challenged its market share in
recent years through prudent brand management backed by sizeable investments in
product development / capacities.

6. Industry Concentration and HHI


6.1 Concentration Ratio

The concentration ratio is the percentage of market share owned by the largest m firms in
the industry, where m is a specified number of firms.

Considering m=4 in tyre industry,

Concentration ratio is 29+17+13+12 = 71, which means the top four firms account for
71% in industry sales.

6.2 Herfindahl-Hirschman Index (HHI)

HHI is measure of market concentration and competition among market participants.

HHI is calculated by taking sum of the squares of the market shares of every firm in the
industry.

HHI for tyre industry is 29+17+13+12+7+5+4+3+4+6 = 1594

According to US department of justice, a result of 1500-1800 indicates moderately


concentrated market place.

7. Raw Material Composition

The tyre industry is highly raw-material intensive, with raw material costs accounting for
70 per cent of the cost of production.

The tyre industry is a major consumer of the domestic rubber production.

Natural Rubber constitutes 80 per cent of the material content in Indian tyres.

Synthetic rubber constitutes only 20 per cent of the rubber content of a tyre in India.

Most of the RSS-4 grade natural rubber required by the Indian tyre industry is
domestically sourced, with only a marginal amount being imported.

The two types of synthetic rubber used in tyres are Poly Butadiene Rubber (PBR) and
Styrene Butadiene Rubber (SBR). The former is used in most of the tyres, while the latter
is mainly used in the radials for passenger cars.

Synthetic rubber accounts for 14 per cent of the raw material cost.

India imports 60 per cent of its synthetic rubber requirements.

Apart from rubber, major raw materials are nylon tyre cord and carbon black.

Source: www.atma.in

8. Economic Analysis
8.1 Fluctuation in Natural rubber prices

RSS 3 and RSS 4 type of rubber sheets are the preferred raw material for radial tyres.

RSS 4 prices in Cochin and Kottayam jumped 23.47 per cent to Rs 14,200 per 100 kg on
July 2nd from Rs 11,500 per 100 kg on March 31, 2016. (Fig. 8.1)

The rise in rubber prices can hit financials of tyre companies going forward.

Shares of tyres majors such as MRF and Apollo tyres declined by 11% and 13%
respectively from April 1 st 2016 to July 1st 2016. (Fig 8.2 and 8.3)

Figure 8.1 (www.rubberboard.org.in)

Figure 8.2 MRF LTD (www.bseindia.com)

Figure 8.3 APOLLO TYRES LTD (www.bseindia.com)

8.2 Capacity Creation and Investments in Tyre Industry in India

Bulk 35000 crore investments by Indian Tyre makers


Delhi-based Apollo Tyres, the largest TBR manufacturer in India, has committed
Rs 2,700 crore investments to double its TBR capacity to 12,000 tyres per day at
its Chennai plant .

Source: www.icra.in

8.3 Dumping of Chinese Tyres

With the import of truck and bus radials (TBR) shooting up 64 per cent in FY16,
the bulk of the Rs 35,000-crore new investments by Indian tyre makers are under
stress.

Most of India's TBR imports are from China, whose share in the category jumped
to 90 per cent in 2015-16 from 40 per cent in 2013-14, according to data shared
by the Automotive Tyre Manufacturers Association (ATMA).

TBR import to India has swelled 2.5 times over the past two years. From an
average per-month import of 40,000 units in FY14 and 65,000 in FY15, TBR
imports crossed 100,000 units a month in FY16, according to ATMA.

The capacity utilisation levels of the industry in case of TBR manufacturing have
come down to 70 per cent in 2015-16 from 80-85 per cent in the previous year

8.4 Customs Duty

While basic customs duty on tyres is 10%, under various Trade Agreements the
duty (on tyres) is actually much lower than the basic rate of customs duty on its
principal RM i.e. Natural Rubber (NR)

Tyre is perhaps the only finished product (vis-a-vis its basic RM) on which duty
inversion not only continues but has actually aggravated in recent years. This
needs to be addressed and corrected on priority.

9. Recent Developments
9.1 ATMA asks for increase in customs duty on tyres

In a representation to Ministry of Commerce & Industry, ATMA has asked for correction
in the anomaly of ongoing inverted duty structure in the rubber & tyre industry.

ATMA has expressed hope that the Ministry of Commerce will seek an early and
favorable action for an increase in customs duty on tyres to at least 30% higher than the
rate of duty on Natural Rubber, the principal raw material which is currently at 25%.

9.2 Corporate Development in the Sector

MRF is planning to set up an Rs 900 crore manufacturing facility in Medak district of


Telangana.

Apollo Tyres has acquired Reifencom GmbH, one of the largest tyre distributors in
Germany for Euro 45.6 million.

JK Tyre & Industries is planning to increase its passenger car tyre manufacturing
capacity by 50% at its Mexican plant to 5 million tyres a year from 3.5 million tyres
currently.

CEAT has entered into an exclusive partnership with Pirelli for distribution of Pirellis
global range of premium motorcycle tyres in the Indian market. This sole partnership will
leverage the companys vast distribution and dealer network pan India .

10. Future Outlook


10.1 Domestic tyre industry expected to grow at 4%-7% over next 3 years

The tyre industry to report a growth of 4%-7% over the next three years, supported by
pick up in auto OE demand across segment.

With the build-up of accruals and expectation of demand improvement, tyre


manufacturers are expected to continue to invest towards capacity expansions,
particularly in the two-wheelers segment which suffers from capacity shortage.

Around 60% of the proposed capacity additions (in volume terms) are focused on the 2W
industry, while in value terms over 45% of the investments are being made in the TBR
segment.

10.2 Capex Programs

The tyre industry witnessed commencement of several large scale capex programmes
during 2015-16.

The industry is currently witnessing investments in projects worth over Rs. 56 billion
wherein these capacities are likely to come on-stream over the next 12 24 months .

10.3 Latest technology and ECO tyres

Self Inflating Tyre Tyre detects how much air is in a tyre and tops it up automatically.
This eliminates the need for drivers to pump their own tyres.

Fossil Free Tyre Instead of using fossil resources for rubber antioxidants, the tyre is
made by using plant oil instead of mineral oil rubber and silica.

Chip-in-Tyre By inserting a chip into the rubber the tyres will be able to communicate
with the electronic control unit and anti lock brakes of the car .

11. Porters Five force Analysis

Competitive
rivalry

Medium

Entry Barriers

Medium

Availability of
substitutes

Medium

Bargaining
power of
suppliers

High

Bargaining
power of Buyers

High

1. With 40 players in the market, industry is highly


concentrated with 10 players holding 95% market
share.
2. As a result they cannot fully pass on price rise to
OEM's due to fear of loss of market share
1. Highly capital intensive industry.
2. Automobile players have ability to do backward
integration.
3. TVS Srichakra - An auto player backward integrated
to tyre manufacturer
1. If domestic tyre prices are dearer than overseas
market, auto players will buy from foreign market
2. Chinese dumping
1. Main raw material used is Natural rubber.
2. Production is not able to meet consumption which
leads to high prices
1. No Switching costs involved.
2. Tyre companies cannot pass on the increased raw
material prices fully to buyers

B. CEAT LIMITED
12. Company Snapshot
1958

Year of Establishment

RPG Group

Parent Group
Chairman

Mr. Harsha vardhan Goenka

Managing Director

Mr. Anant Vardhan Goenka


Mumbai

Head quarters

57.05

Revenue (in Rs billion)*

252100

Sales Volume (MT)*


Manufacturing Facilities
PAN - INDIA Network

Bhandup, Nasik, Halol, Nagpur


Ambernath** & Srilanka
3500+ Dealers, 300+ Franchisees
250+ Distributors, 460+ Districts
covered
12%

Market Share*

* - In FY 2015 ** - Under Commission (Source: Annual Report 2014-15)

13. Key Financials


Mar-16

Revenue from
Operations
EBITDA
PAT
PAT to Net Sales
EPS
Net worth

Mar-15

in Rs crores
5681
5705
822
446
7.90%
111.87
1991

680
317
5.60%
79.76
1598

Growth
(%)
-0.42%
20.88%
40.69%
41.07%
40.26%
24.59%

14. Financial Highlights

15. Revenue Drivers


14.1 Positive outlook for automobile Demand

Tyre demand is a derived demand, which has a strong linkage with automobile industry.
Hence growth of automobile industry is key revenue driver for tyre companies.

Strong start to FY 2017 provides relief to tyre manufacturers. The domestic two wheeler
industry expanded by 3% touching 16.5 million units during FY 16.

Rural demand may witness growth due to good mansoon season this year which increases
demand for Two wheeler and Farm vehicle segments.

14.2 Radialization Opportunity

Radialization has emerged as a key factor for Indian tyre growth industry.

A radial tyre has a longer life and offers high fuel efficiency and hence is effectively
cheaper than cross ply tyres over the life of the tyre.

Radialization in passenger car segment has reached 100%. However it is extremely low
in Truck and bus (T&B) segment at 14%-15%.

According to ICRA, Radiation levels in T&B segment are likely to reach at 50% over
next four years. This is favorable opportunity for the company as their major customer
segment is T&B segment.

14.3 Research & Development

With the growth in Radial tyres in T&B Segment, investment in R & D in this category
and there by developing durable radial tyres will meet the demanding conditions in
Indian market.
Ceat tyres have launched 102 new products in the FY 2014-15 building its position as
innovative player in the market.
Development of special TBR for meeting high heat, high speed and overload
performance was carried out in the middle east region.

14.4 Government impetus to infrastructure growth

With the increased government thrust on road infrastructure development, leads to greater
demand for tyres.
Increased focus on agriculture and manufacturing sector is also expected to boost the
economy as well as the automobile/auto component sector

16. Cost Drivers


16.1 Fluctuations in prices of raw materials

Indian tyre industry is highly raw material intense and margins are correlated with price
movements of raw materials.

Movement in Natural rubber prices can make or break the fortunes of tyre manufacturers.

Prices of natural rubber constitutes around 44% of total input costs.

RSS 4 prices in Cochin and Kottayam jumped 23.47 per cent to Rs 14,200 per 100 kg on
July 2nd from Rs 11,500 per 100 kg on March 31, 2016.

16.2 Domestic Natural rubber Demand-Supply Imbalance

(Fig. in MT)
Source: www.icra.in

Clearly domestic production is not meeting the demands of the country. This leads to
import of rubber which increases input costs of the company

16.3 High Custom Duty on Natural rubber

Source: www.icra.in

Source:www.icra.in

Customs duty is highest in India compared to other countries. This will add further costs
to tyre manufacturers.

17. Key Financial ratios

KEY FINANCIAL RATIOS

Mar-12

Mar-13

Mar-14

Mar-15

Liquidity
Cash to current liabilities (times)

0.039

0.045

0.056

0.245

Cash to average cost of sales (times)

2.908

5.911

7.011

4.185

Quick ratio (times)

0.397

0.409

0.462

0.698

Current ratio (times)

0.751

0.725

0.87

1.134

1.968

1.367

1.189

0.476

Interest cover (times)

1.055

1.899

3.246

4.401

Interest incidence (%)

14.5

12.8

12.9

11.3

-4,334.30

-4,944.70

-2,405.40 2,057.30

3,915.90

3,966.70

5,416.50 6,958.90

Working cycle (days)


Raw material cycle

32

28.2

26.3

30.5

WIP cycle

2.8

2.7

2.6

2.3

Finished goods cycle

24

24.1

30

32.1

41.7

43.2

42.4

41.5

100.5

98.2

101.3

106.3

Creditors cycle

69.9

69.4

64.4

61.2

Net working capital cycle

30.7

28.8

36.9

45.2

11.401

12.942

13.88

11.982

129.065

134.638

141.173

158.977

Finished goods turnover

15.22

15.115

12.164

11.377

Debtors turnover
Creditors turnover

8.755
5.225

8.452
5.258

8.608
5.667

8.798
5.967

1.645

1.736

1.813

1.751

21.603

18.547

19.319

17.048

Debt to equity ratio (times)

Working capital & turnover ratios


Net working capital
Net working capital (cost of sales method)

Debtors cycle
Gross working capital cycle

Turnover ratios (times)


Raw material turnover
WIP turnover

Asset utilization ratios (times)


Total income / total assets
Total income / compensation to employees

The short term investment have risen by 17% from the last year which shows that the
company is investing more in the in the working capital and which is will result in more
smooth business. This has also resulted in a reduction in cash and bank balance.
Companies current ratio has gone up but quick ratios has dont have much deviation which

indicates that the raw material or inventory in current assets are more which indicates that the
company have adopted a policy of more inventory or the company got a big order in the year end
which led in more raw material in the year end.
If we see the working capital cycle it is seen that the companys working capital cycle has
risen by 10 days which is very huge. This indicates that the company has adopted a policy of in
which the company is going ease on the last year policy. But the company is also having a bad
time with its creditors which mean that the company is paying its creditors well in advance but
debtors dont have much change in the policy which makes the company invest more in working
capital.
The Turn Over ratios have fallen from last year which is good for the company because the
goods are being processed fast but the company is not having a good faith because the WIP TO
has raised which is not good for the company and the WIP TO have raised by 10 days which
says that the company is able to process only 2 lot of goods if we see the WIP TO which
compensates the fall in other TO ratios.
Asset utilization rations of the company has fallen, if we see in the last year all the ratios rose
from the previous year but the company was not able to maintain the stability because of some
factors which were not favorable for the company . Total income to total asset has fallen which
says that out of 1 rupee of total assets the company is able to make 1.751 of income